The government is expected to cut 880,000 public-sector jobs by 2017. Photograph: Christopher Thomond for the Observer

George Osborne's seven-year austerity drive will slash the size of the public sector to a record low as one in seven state employees lose their jobs, according to a new analysis.

When the independent Office for Budget Responsibility published its latest projections alongside last week's budget, it increased its estimate of the number of jobs that would be lost in the public sector by 2017. The Chartered Institute for Personnel and Development says that, as a proportion of the total workforce, this will take the size of the state sector to its lowest level since the birth of the welfare state after the second world war.

"The number of people employed in central and local government will have fallen by around 700,000 during the course of the current parliament and by 880,000 by the time the chancellor hopes to have closed the structural fiscal deficit in 2017," said the CIPD's chief economist, John Philpott.

"This will easily wipe out the net rise in public sector employment under the Labour government between 1999 and 2009 and take the public sector workforce to a record low."

Brendan Barber, general secretary of the TUC, said: "Getting rid of one in seven public sector jobs will have a devastating impact on the public services we all rely on and deal a huge blow to local economies across the UK. A public sector jobs cull on this scale will depress local economies and cause even further job losses in the private sector. The government must stop this cruel and self-defeating attack on public sector workers before it's too late."

At its height, as Labour ploughed resources into health and education, the public sector accounted for one in five jobs in the economy, Philpott says; but that will have declined to just one in six by the end of the chancellor's deficit-cutting spree.

Already, 270,000 public sector workers have lost their jobs since the coalition came to power, and since they are disproportionately women, the cuts have helped push female unemployment to a 25-year high.

Osborne believes that increased investment and hiring by private sector employers will help to take up the slack as the state shrinks. But private businesses hired just 226,000 more people in 2011, failing to keep up with the pace of public sector job cuts.

Philpott said the shift towards the private sector would transform the nature of the labour market. "Whatever you think about it, public sector jobs tend to be a bit better paid, a bit more comfortable, a bit more secure," he said. Instead, he believes, proportionately fewer public sector staff could create "more of an Americanised workforce", where jobs tend to be more casualised.